Working Poor and the Efficacy of the Earned Income Credit and T.A.N.F.
When many Americans think of poverty, they think of people who are not working. Moreover, when they think of social welfare programs, they think of those programs aimed at assisting families without wage earners. However, many of America's poor are the working poor; families with one or two wage earners that are still mired in the depths of poverty. The government has implemented two different programs aimed at providing financial assistance to these Americans: the Earned Income Credit (EIC) is a special income tax rebate for low-income workers which can actually help low-wage workers avoid paying any income taxes and entitle them to a cash rebate beyond any taxes that they have paid; while the Temporary Assistance for Needy Families (TANF) program provides for the direct distribution of cash payments to families struggling with poverty.
These two programs signaled a significant change in governmental policy for the poor. In many ways, up until that time, government aid was aimed at the chronically impoverished, with little expectation that government assistance would provide a meaningful tool for transitioning out of poverty. However, starting in the 1970s, the government really began to target the working poor. First, in 1975, the government enacted the earned income credit, "and over the years it has grown to be one of the principal antipoverty programs in the federal budget" (Forman, 1999). Then, "In 1996, in the midst of already sharp falls in the caseload since 1993, the Personal Responsibility and Work Opportunity Reconciliation Act was passed. Temporary Assistance for Needy Families (TANF) replaced Aid to Families with Dependent Children (AFDC), changing what had been an open-ended federal matching grant into a block grant to states. It added requirements that a sizable share of recipients be working (or that state caseloads be reduced equivalently), and imposed a 5-year lifetime limit on benefits for most recipients. States were given the option of adding whatever other restraints they chose, including setting even shorter time limits" (Ellwood, 2000).
The Earned Income Credit
The Earned Income Credit (EIC) is a special income tax rebate for low-income workers. The amount of the credit depends on level of income and the number of dependents, so that it can lead to a tax refund that is greater than the amount of taxes paid into the system through withholding. The EIC has varied over years, sometimes providing benefits for more than two dependents, and sometimes maxing out at two dependents. It will revert back to a two dependent maximum in 2013. The EIC can result in a significant amount of money back to the working poor. For example, in 2012, the maximum EIC ranged from $475 for a family with no children up to $5,891 for a family with three or more qualifying children. When one considers that for many families that are eligible for the EIC, those maximum amounts are equivalent to more than two months' salary, those numbers become really significant. Furthermore, while both earned income and adjusted gross income have to meet requirements for EIC eligibility, those salaries are higher than one might expect, though they start at $13,980 for a single person with no qualifying children, it is as high as $50,270 for a married couple filing jointly with 3 or more qualifying children (See generally Perez, 2012).
The EIC has shown some success in meeting the goals of the program. The hope was to increase work by single parents and to increase work in married mothers, and these reforms have helped increase work among the lower socio-economic class. Another goal of the program was to help change marriage and cohabitation rates among the lower socio-economic classes to increase co-parenting among that group. However, the EIC has not necessarily had that impact. "marriage and cohabitation have not changed dramatically, but there is at least a hint of some changes, though these effects are far more tentative and sensitive" (Ellwood, 2000). This is understandable in some ways, particularly because the EIC has been combined with changes to traditional welfare programs, which were not generally accessible with an adult wage-earner living in the home.
The EIC has become a significant way to transfer wealth back to low-income families. "Whereas low-income working families were eligible for about $5 billion (1998 dollars) annually about half of this growth can be traced to expansions in the Earned Income Tax Credit (EITC). By 1996, inflation adjusted federal expenditures on the EITC alone exceeded the combined real state and federal benefit expenditures on AFDC benefits in any year. And starting in 1998, a non-refundable child tax credit has been in place ($400 per child maximum in 1998, $500 thereafter). As a family's income pushes them into the range where they owe taxes, this credit can be used to offset these taxes" (Ellwood, 2000).
One of the interesting innovations of the TANF program is that, even though it limits some of the benefits for the non-working poor, it has actually expanded support for the working poor. Prior to TANF, Aid to Families with Dependent Children (AFDC) was the primary government support program for low-income families. However, AFDC was not achieving the goal of transitioning people off of welfare and into the workforce. Instead, there was an increased number of welfare caseloads and the rate of non-marital births, which led to a push for welfare reform. Much of early welfare reform was on a state level, where states instituted their own welfare-to-work programs. The concept of welfare to work became an important point in the 1992 presidential elections and led to the institution of welfare reform with the TANF program. The thought was that AFDC had promoted a multitude of socially maladaptive behaviors including: network, out-of-wedlock birth, and divorce. Furthermore, under AFDC there was no impetus for custodial parents to work with child-support enforcement agencies to obtain child support from non-custodial parents.
TANF hoped to increase work among welfare recipients, and it certainly did so, particularly among single mothers. However, there was a decline in employment among TANF recipients. Furthermore, while TANF had time limitations, many of the people who left the program involuntarily did so without marrying or finding employment, so that their families are ostensibly without any real means of support. There has been a decline in the number of people living in poverty; however that decline has not been met with a matching increase of people who are actually capable of supporting their families without reliance on other forms of public assistance, even if they are outside of TANF eligibility. It is critical to keep in mind that in addition to TANF, families may qualify for food steps, section 8 housing assistance, Medicaid or ChIPs programs, and other federal subsidies to the working poor. Transitioning out of TANF should not be seen as successfully transitioning those families to self-sufficiency.
In fact, one of the critical issues surrounding TANF is the issue of childcare. For many low-wage workers, childcare can literally equally their earnings. One of the changes from AFDC to TANF seemed designed to make fewer of the working poor actually work. "Under AFDC, states were required to provide child care for recipients who worked or participated in work-related activities. TANF has no child care mandate" (DiNitto). However, it is important to realize that in many states there was no real decline in federal funds spent on childcare, because TANF still permitted the states to spend TANF funds on childcare (DiNitto).
Moreover, while workforce participation may have increased, it is important to note that there has been virtually no change in entry-level incomes for the working poor. These are low wage jobs, which are going to offer very little in the way of benefits and job protection, which may make the working poor even more vulnerable to workplace exploitation. Therefore, while families may have left welfare, leaving welfare has not been associated with an increase in standard of living or a positive change in socioeconomic status. This is why welfare leavers may become involved in boomerang behavior. "People who leave welfare commonly return, and this phenomenon has become more pressing in the time-limited TANF program. Fostering stable TANF exits may be particularly difficult in poor inner-city areas because of job shortages and neighborhood deterioration. Perspectives of TANF leavers from five focus groups in Chicago about problems leading to welfare returns are presented. Participants indicated that low wages and unstable jobs were most often responsible for TANF returns" (Anderson et al., 2004).
Despite these caveats, it is important to realize that TANF has had some success. More than 2 million families have left TANF since the institution of welfare reform, though the fact that those reforms began during an economic boom time makes it difficult to totally attribute that success to the success of the TANF program (DiNitto, 2010). Furthermore, "Current debates about the success of TANF reforms have been obscured by the use of inconsistent indicators of success, as well as by measurement difficulties associated…